Provident Funds- Keep it Simple, Safe

This is something I had penned nearly five years ago.  The basic theme is that the PF burden on a govt should be limited to some basic salary- Let us think 50,000 per month instead of 20,000 that I have considered. Give protected rates of interest on PF contributions for salaries up to 50K and on the balance, let it be market determined. Or let the govt give a small subsidy. After all, the govt gets permanent funds- the PF will normally keep growing. And by doing away with administrative burdens of investing here and there- Simply pass it on to GOI and let the GOI pay a fixed rate of, say 9 percent. The implied subsidy will be hardly anything in the context of the waste of resources that is now being done. And this is one subsidy that will go to a good cause)

Provident Fund has always been a source of irritant to the policy makers and the critics. To me, it is a question of too much thinking on a straight and simple topic. To me, the Provident Fund is the cornerstone for my retirement. I do not want any risks to be taken with it. While I understand the benefits of equity investments, I do not wish my PF to be put in to this instrument. I do not want my PF money to ever grace the bank account of any private sector company in India. My PF gets invested for long term and nothing except the sovereign guarantee will survive the tenure of a PF.

I am happy if the government guarantees a rate of around eight percent (assuming we do not see inflation cycles worse than what we have seen in the last thirty years). If required, the government can say that if the inflation rate is below eight percent per annum over a five year moving average, the interest rate would be eight and should it go up, it would be adjusted to match the inflation rate, for those years where the eight percent moving average is breached. And let the benchmark for inflation be the Consumer Price Index.

Further, let the PF be limited to salaries of up to Rs.20,000 or so per month. In case of higher salaries, let the option be given to the individual to make a choice.

There is a complicated method of investing this PF money by the EPFO. So many intermediaries, so much of risk and at the end of the day, the return is around eight to nine percent. Why have all this complex arrangements and heightened risk?

Let all the money go to the government. In any case the government is raising debt by issuing paper. Let the PF moneys get a guaranteed eight or nine percent. The government may, at worse be paying an extra percent or two over the long term. Today, the EPFO has nearly 42 million accounts. Let me assume, generously assume that the average PF per account (12% of 15,000 from employer and employee each, per month- or around Rs.3,600 per month, including employer contribution) is an annual Rs.43 thousand. So for 42 million accounts, the annual accretion would be of the order of under Rs.200,000 crore each year! Today, the PF amounts cited include the PF on the higher salaries too, without the ceiling cut off. Let the ceiling be in place- After all, the government is obliged only to provide a base level and not guarantee the savings of the rich and famous through subsidies. At under Rs.2  lakh crore today, even if this increases by five to six percent each year, the damage on the exchequer is not large.

On 2 lakh cr, the differential would be around Rs.4,000 crore for the year. Let us assume an accumulated corpus of 20 years. In which case it would be around Rs.20 lakh crores or so, with compounded interest. On this amount, annual subsidy at two percent would beRs.40,000 crore! And we can do away with all the management costs that are now being incurred in the management of the corpus. And this subsidy is well worth the social benefits that accrue. This 40,000 cr number assumes that the Govt can raise perpetual money at six percent. If we think eight percent is fair, then the question of subsidy does not arise at all.

So, instead of debating where to put the PF money etc, let the entire thing go to the govt, interest be funded each year by the govt and do away with private trusts or management of PF moneys.

( I hope my basic numbers are right. If anything, I have perhaps erred on the higher side, I think)


In praise of passive investing

(This appears in today’s Deccan Chronicle- (

(Most investors without the stomach for volatility get trapped each time the market takes a turn or toss. Investing is a journey with many twists and turns, especially when it comes to mid caps. Some take aways from the market)

The last few months have brought home the risks of investing in to direct equities. There are many stocks which have fallen from favour due to some governance issues or some controversies. Even the mutual fund managers have been caught in this mess. Whether it is DHFL or GRUH or Yes Bank or the many commodity stocks that have seen their best behind, there are many casualties that have eroded wealth.

The Big Indexes do not seem to indicate any panic. The markets seem to be holding their own However, if we go to the next levels, the scene is like a battlefield. There are so many casualties and a few fatalities also. Many people would have been tempted by the noise of the market and got in to the market in 2017 or 2018. From there most commodity sector and NBFC stocks have not gone anywhere and most have cracked hard. So if you bought just two shares and both lost 40%, you are sitting with 60% and unsure of what to do. Most likely, you will sit on it in the hope that price will come back.

On the other hand, a Mutual Fund would have a large enough breadth such that even if three or four stocks tank badly, the impact on the overall NAV would not be much. For instance, if 30% of the holdings crack by 50%, the overall impact is only 15%. Of course, when the bull is roaring, the MF will lag your exhilarating climb.

For those who cannot stomach these steep changes, the Mutual Fund route is better. Diversification may moderate the returns, but it will also fall less.

Most commodity stocks you bought would have been bought on the basis of the P&L account (earnings, earnings growth, P/E multiples etc) .  I have generally used the Balance Sheet measures to buy commodity stocks. Just because China has shut some capacities does not mean that commodity prices will keep going up forever or that additional supplies will not come. Sooner or later, supply overtakes demand and all players go in to  the red. Then some players go out and the balance of demand supply shifts.  And in this business there is not much differentiation. So best is to buy or sell shares on the basis of the ‘replacement’ value of the business. Thus, I use the trend in “Price to Book Value” to buy or sell in this sector. I do not know my wait time, buy when I buy close to the lower end (as evidenced by past trend) my downside risks are lower and upside risks are higher.

Similarly, most NBFC stocks went in to valuations that were driven by growth rather than value or ROE. The best in this sector cannot even earn an ROE that is one fourth of the best in the manufacturing sector. There are no entry barriers and growth is predicated on an endless availability of funding. And the ability of this industry to keep bad debts low. Scandals in one lead to fear in others. And we can see that mutual funds and insurance companies seem to be the biggest provider of funds to this sector. And every company seems to be comfortable with a large short term funding source (Commercial papers, one year papers etc) in the hope that it will always be rolled over. When a DHFL scares the market players, every one (except possibly the big and old established names) will not find money even at a price. This will lead to a chain reaction, call for government intervention and rescue operations. One glance at the secondary trades happening in the debt papers of these finance companies show indicative yields as high as 18% for some lesser known names. This clearly shows that most are having to slow down their fresh disbursements and use that to repay debt. Thus, earnings disappointments will probably send the prices of the shares lower.

I still hold that Equities as an asset class get the best returns, over a long period. Understanding price behavior, business cycles, commodity cycles etc takes a lot of attention span.

In every investing journey, there are ups and downs. It never progresses as per the excel sheet design. Staying put in a SIP of an ETF (or an index fund as second choice)  is probably the safest way to preserve and create wealth without the stomach churn that accompanies direct equity investments.

One important thing to understand is that in direct equities, things are dynamic. For instance, our auto sector has been valued almost like FMCG companies. One day, maybe there will be no fossil fuel vehicles and all would be driven by alternative energy. Will all the old companies survive? We do not have answers yet. Every auto maker is ‘talking’ about his preparedness. The day of reckoning will throw up new winners and losers. Blue chips of yesteryears may fall by the wayside and new heroes emerge.  Technology companies seem to have very short life cycles. Last mile delivery platforms are constantly evolving and what is exciting today will be outdated tomorrow.

To sum up, learn your own tolerance for risk, before you choose the path in equity investing.









(This appeared in the Deccan Chronicle on 28-1-2019)

Mr Market always wins. Those of us who think that we have mastered Mr Market are living a lie. I recall a tagline from a movie of the 1980s named “JAWS”. The tagline was “Just when you thought it was safe to enter the water….”.

Mr Market seems to be in a vicious mood as of now. Some of us would have played safe long ago and pulled their money off the markets. Some of us have invested long ago and are not bothered by this turbulence. Some of us are peacefully committed to our SIPs and are continuing it.

Then there are some of us who have made quick money and then got caught a few months ago in the first round of mid cap stocks losing their value. Many of us had stayed away from the markets and came back a couple of years ago. And boy! Were we good? Everything we bought was the perfect pick! It reached a stage where we bought first and then wrote the story of the stock.  Then a rude shock. The first round of panic when the mid-cap stocks got knocked about. Then the stories of poor management, frauds and corporate governance issues. When you lose money, you have time to read all this and then ponder. Now we have lost money and bought wisdom. Alas, wisdom is like ice-cream. It melts when the market gets hot.

Commodity stocks cracked three months ago. We bought. Saying that they have ‘corrected 30%” from their peak. Now, they seem to be cracking yet again. We did not pause and see what happened in the last three years, last two years, last five years. We were focused on the “52 week” highs and low. Our mind got anchored to this number.  We did not look at a three or five year high or low. This probably makes sense to us only after we lose money. As I said, this is the time that the fresh batch of ice-cream is starting to set.

The biggest damage comes from commodity stocks and from stocks that are the beneficiaries of poor governance.  And note one lesson. Companies with “DEBT” beyond a reasonable level are also going to hurt investors. What is a reasonable level? Debt should be such that the profits after tax and dividend should cover the repayment of interest and principal in three years. This is my safety valve. I also want the company to be a tax paying one.

I have written in the past about commodity stocks. Once again, I would like to remind you that these are called ‘cyclicals’. It is because they go through a cycle of bust and boom.  Thanks to China curtailing some of its commodity output and exports, our companies had an unusual window of supernormal profits. Sooner or later the earnings will come down. Commodity stocks are not like consumer goods where there is pricing power with the seller. And periods of excess profits lead to higher investment in the sector and then higher output brings down the profits. And with global trade shrinking (I fear this trend is now set), there is bound to be lower growth and higher pressure on profits.

I like to relate Commodity stock to a simple “Price to Book Value” measure.  See a ten-year trend in this and buy when it comes very close to the lower end and sell it when it gets to the upper range. This approach is MY preference. I am not guaranteeing that it would always work. Often, the bad cycle lasts a long time and the good times are short. The noise level makes us think that good times are always around.

Another important thing if we are ‘trading’ is to have very strict ‘stop-loss’ and ‘stop-gains’ and faithfully follow it. When we are trading, we are essentially trading prices. Never lose that focus. “Stop Gain” is something that helps to prevent greed from overtaking emotion. When a stock is climbing, we forget everything else and just want one more digit added each time. Then when it slides back, our mind gets anchored to the high price we saw and we wait. Sometimes, this wait can be for over a decade.  Let us say I keep the ‘stop gain’ at 30%.  Even if I think that the stock may go up ten times from here, I should sell it and buy it back. This will help me by pushing the ‘stop loss’ higher and higher as stock price defies gravity. This will help you in good times and bad times.

Is the worst over? I have no clue. However, commodity stocks are off my radar for now. If I can see non-cyclicals tumble, I may add some. Otherwise, go ahead with your SIPs and get equipped with more and more learnings.





Bandhan for GRUH…

( I am not very sure that GRUH has done the right thing by this hurried alliance with Bandhan Bank. HDFC could simply have folded it in to itself. Why let the competition get something on? I can understand if it was an all cash where Bandhan pays cash at these fancy valuations. But paper for paper does not make sense… Bandhan bank gains … My article in today’s Deccan Chronicle.. )

Bandhan Bank and Gruh Finance- Wedding Bells   

GRUH earns a near 30% ROE and was valued at between 14 to 16 times book value.

Bandhan earns a ROE of around 20% and was valued between 8 to 10 times book value. Both have good quality of loans. GRUH has fantastic parentage and a very long history.  The nature of business of GRUH carries far lower risk than Bandhan Bank’s business does.

0.6 Shares of Bandhan Bank buys one share of GRUH.  The reported book values as at March 31, 2018 were approximately Rs.23 per share for GRUH and Rs.79 per share for Bandhan. If we go by Book value alone, the ratio should have been around 0.3 share of Bandhan for every share of GRUH. If we take in to account the fact that GRUH has an ROE which is one and a half times Bandhan Bank, we could push the swap higher to nearly 0.45 shares of Bandhan for every share of GRUH.  The actual ratio is another third higher.

The higher ROE of GRUH is possible because of a parentage that helps gets funds at low cost and keeping a small size helps it to remain focused on its profitability. It is able to find a large enough market with attractive growth, without giving up on profitability, in terms of ROE). Clearly a brilliant business has been built.  On the other hand, Bandhan Bank will now see its ROE falling as it keeps increasing its risk profile. It WOULD also have a cost of borrowing higher than what GRUH could enjoy WITH the support of HDFC association.

GRUH will now become the housing loan portfolio of a commercial bank. Clearly, the shareholders of GRUH will be now shareholders in a less attractive business and will not enjoy the premium valuation that GRUH shares used to enjoy. GRUH shareholders enjoyed a valuation that was clearly out of whack.

Bandhan Bank also enjoys a premium valuation, based on its promoter quality and its track record in the microfinance business. It has some way to go before establishing itself as a commercial bank of quality. Given the promoter background, there is expectation that after Kotak Bank, we have another bank of High Quality. Bandhan Bank promoter has also created a clever ownership structure which ensures that the rewards will go to the employees. All the employees have been made the shareholders, through a “Trust” structure. I am not sure how it would work and what would be the implications of this. Bandhan Bank also has the issue of a not so well known second line.  GRUH was always looked at as an HDFC child and now the challenge for an independent CEO or a business manager will be debated.

Shri Deepak Parekh made an important comment about a ‘cultural’ fit.  As far as I can see, it seems to be a good marriage and the cultures seem to be well aligned. Employees have no reason to be unhappy. The fact is that two legal entities will become one. Some duplication would have to be culled.

If I were a shareholder in either, I wish I had sold off my positions just before the merger. Not being in the know, many of us have a call to make. Not many of us own both the shares. If I were to be an owner of GRUH, my concerns would be to decide whether to own a specialized well run housing finance bank or a young bank that has the potential to be a great bank. If I was a shareholder in GRUH since a long time, the only thing I was counting was the dividends and the ownership continuing unchanged. Now, there will be more worry points when the combined entity is created.

On a pure qualitative basis, I will perhaps be happy to exit both the stocks and buy in to an established one like HDFC Bank or Kotak Bank.  For a Bandhan Bank shareholder, there is an immediate gain as a new growth area takes care of size to a great extent.  I am not sure that Bandhan Bank will be able to raise resources as easily as GRUH or even at a cost that is comparable.  On the whole, the combined entity will earn a ROE that is lower than that of GRUH. And possibly it will protect the ROE of Bandhan Bank, going forward. It is clear that the business focus of Bandhan Bank is the MSME segment, that provides a higher return. Risk management and culture holds the key.

Let me also be clear that I do not have a view on the prices of the shares of the companies I have mentioned. My focus is purely on the quality and some aspects of business, going forward. So please do not take this as a buy/sell on ANY of the shares mentioned above.

( Note: I do not own shares in either GRUH or Bandhan. I do own a few shares in Kotak Bank, HDFC and HDFC Bank.)


New Year thoughts … 2019 in our stock markets

I started the year with an interview with “pGurus”. A great initiative by Sree Iyer and his friends.  We had a rambling talk covering different parts of the finance sector and here is a link to that video


In the discussions, there was some discussion on what the RBI should do with the reserves that the present government seems to think can be used before the 2019 elections to help buy the votes.  While it is imprudent to do so, ignoring the ‘what ifs’ I have some thoughts on what COULD be done, if the govt does resort to this. Of course, what I write is surely too idealistic. No politician thinks long term and the sole focus of those in power seems to be to grab the next five years… Each day in power adds to riches… I am not referring to the citizens.

Here is a link to the article I wrote

I wish everyone a very happy new year.





(An early column in Moneylife. I DO NOT COVER ALL THE SITUATIONS under which one sells or should consider selling. A trader may have his own rules for selling. So long as he sticks to his process and discipline, he should not bother)

4 Reasons To Sell a Stock


Selling a stock is much harder than buying. Here are some tips that will help you

Selling stocks is not an easy decision. Sometimes, I think that selling is far harder than buying. I am not one who believes in trading on my inventory. I know people who will have a large holding of, say, Tata Motors, and will keep buying and selling small portions of that holding on a regular basis. This is what many mutual funds or professional money managers do, too. To do this, one has to be knowledgeable about the price movements and also spend time on monitoring prices every day.

Others who can sell regularly are those who deploy some capital in buying and selling, for short periods. They use what is commonly known as ‘stop-loss’ methods. For instance, I may decide to make a short-term trade on, say, ITC. I buy it, say, at Rs390. My expectation is that I will make a 5% absolute gain on that. So, I decide that I will promptly sell when my target is reached. So, at around Rs410, I sell. I do not hold on to it for a better price. I may buy it once again, but that is a separate trade.

I will also add a caveat that if the stock slips below Rs380, I will sell it. In other words, I am willing to risk a loss of Rs10 per share, for a gain of Rs20 per share. At Rs380, I do not pause to think, but simply sell. I may add another dimension to it by saying that, in any case, I will not hold this position for more than two weeks. So, at the end of two weeks, I will, in any case, get out. This makes me a trader. I am more of a trader in ‘prices’ than in stocks. Short term is my focus. If I am an investor who buys shares ‘forever’ with the money that I do not need at all, selling is a difficult call to take. Here are four factors you may like to consider while deciding when to sell a stock.

1. When the basic reason for buying turns out to be false. I would have done my homework; but, subsequently, I find out that the story is based on wrong assumptions or facts. Here, quick action is called for. Otherwise, it will lose its price and I will be waiting for eternity, with partial or total loss staring at me.

2. When a fraud is discovered. In such cases, it generally pays to get out quickly. In some rare events, these can become buying opportunities (like Satyam); but, by and large, a fraud would mean that we get out. A bull market helps us to exit better because some followers would hope for a turnaround, etc. However, my experience is that fraudulent accounts or manipulation is generally a terminal disease.

3. Using a historical trend analysis. I can dig up the past 20-year trading band (the P/E levels at which the stock trades) of HUL and decide on that basis. Let us assume that the stock has ranged between a maximum of 50 times P/E and has never gone below a P/E of 25. This means that it is generally good to sell when the P/E is close to 50 and re-enter at a lower price. You cannot time the re-entry or be sure of when. Once you sell, there is no guarantee where the stock will retrace itself. It does not follow an orderly pattern moving from one end to the other unfailingly. So, I use this exit method for part holdings in a stock and create cash balances. I always believe in keeping some cash so that I can buy when there is a juicy opportunity or add another stock to my portfolio.

This is also a good rule to follow when one has to gradually sell for reasons of estate planning or to meet some capital outflow in the near term (say, two to five years). I like to raise cash well in time. While I have faith in my stock selection, I have no control over where the price will be one day or one week before when I need the money. The above-mentioned method can be applied only for mature stocks with a long history. A newly discovered stock will keep breaching the upper and lower PE limits constantly.

4. When there is a corporate action: A merger/amalgamation involving the stock we own is a tough one. If the stock we own is being acquired, then by staying put, we are actually buying the company that we did not want to own in the first place. Often, when there is an acquisition of the company we own, the call may be easier.

When you build up a portfolio of quality stocks over a long term of two to three decades, you could either pass it on to your heirs or to a charity. In such a case, you do not have to worry about selling, unless there is a problem with the portfolio. In all other cases, it is best to think about selling when you have time on your side and are not forced to sell when the market is not right. It is also a good thing to have a yearly peep at your portfolio for a health check. Selling has to be a planned activity. Often, we could have illiquid stocks on hand where the trading volumes are sparse. You may have to stick to your price limits and sell over a longish period of time.

The other rule I like to follow is to always keep some liquid funds on hand. You can achieve this by periodic selling. And, while waiting to buy stocks, I keep the money only in liquid funds. To me, access at a day’s notice is more important than returns, for this component of my wealth.

The other important lesson I have learnt in life is to employ more than one broker, when we are short-term traders. As a rule, it is best not to buy and sell the same stock through the same broker. Use one for buying and another for selling. It keeps conversations with the broker short and also keeps him away from understanding your game or strategy and then putting in his own two-bit. In this, you may find it easier to trade online, especially since online trading is much cheaper due to lower brokerage costs. It is surprising that institutional brokerage houses charge higher brokerage for online trading than for off-line trading.

One last point comes to mind. A bull market is great for getting rid of mistakes we have made. If you are still holding on to something simply because it sank after you bought and you hate to book losses, this is a great time to correct it. At times like these, even donkeys are positioned like horses. So never carry a mistake. You will be better off selling a bad stock at a loss and putting your money into a good quality stock even at a higher price.


(This appears in Deccan Chronicle of 17-12-2018.

If we take this too seriously, we will end up keeping currency notes under our pillow. Money and greed are two sides the same coin. So tread with knowledge rather than believing that someone is spotless. Reduce your chances of emotional and financial loss)


Corporate Governance. Insider trading. Inflation of project cost. Fixing share price. Insider information. Unaccountable accounting.

Take your pick. Slowly the skeletons are coming out. One by one. Big names, small names. Names that shock and surprise. Names we do not want to believe.

Faith seems to be in short supply.

These are brutal reminders to us that we often ignore ‘Management Quality’ in evaluating our investment choices. We gloss over most things, saying that all is fair in business. And we think that it will not pull down the company or the share price. For too long, we are used to white collar crime being unpunished. We have iron in the soul when it comes to our unshakeable faith in the ability of Indian company promoters and managements to survive anything and everything.

We do not wish to believe that the management of the shares we have invested in can be less than honest. We justify later findings as ‘business expediencies’ or just say that this kind of wrong doing is common.

In the old days, when the stock markets were not crowded with the investors like present day, the promoters found it ‘necessary’ to steal from the company. Inflating capital costs and stealing it was the most popular. Similarly, having family entities participate in various purchase and sales activities would help to siphon out regular cash for them. The stock markets did not permit raising money at the high valuations that one does today. Thus, raising capital meant big dilutions. Thus, they had to have cash flows large enough to keep subscribing to ‘rights’ issues. Naturally, this money had to be take out from the company.

Gradually, as the stock markets grew in popularity and the advent of institutional investors, things started looking better for the promoter. Now, he realized the power of ‘valuation’. In the old days, for example, the share would get valued at ten to twelve times earnings. Now, the market give valuations of thirty times up. In other words, every rupee left behind in the company is valued at 30 to 40 times in the capital markets. Thus, it is easier to ‘inflate’ earnings and make money on the shares. So instead of stealing from the company, the efforts are focused on dressing up the chicken.

Pumping up the earnings is possible through many routes. For instance, choice of accounting policies, valuation of inventories, fake sales, capitalizing revenue expenditure, chilled out depreciation practices etc are the preferred routes. Most of these cannot be detected by the best of auditors. Unless some promoter does it on a scale that is so large, these kinds of transgressions cannot be discovered. Not just in Indian companies. Even in MNCs. A strong CEO can keep stealing for long time.

There are others who do some wholesale theft. Like ‘acquiring’ companies overseas at fancy prices and routing the proceeds in to personal accounts through some arrangements. The target entities can belong to friends and family. And after a few years, write off the investment in the subsidiary. While the cash has gone out, the P&L has been untouched.  An NBFC can create a fake loan and do a write off.

A crooked promoter can always outsmart a good auditor for as long as he wants. Same way, having ‘independent’ directors (ID) is a charade which serves no purpose. These IDs can only know what they are told or shown. They are not experts in the business and can only talk on various governance issues or comment on business strategy. It is always the CEO and the promoter who drive the business. IDs can at best object to something that is wrong on the face of it. With SEBI trying to pin more and more responsibilities on the IDs, I suspect a time will come where “ID” will be the highest paying job in a company. And no one would want to be an ID for the sake of it. Some people talk about ‘IDs’ from a pool formed and company not being given a chance to choose its own. It is akin to having opposition members in the Central Cabinet. Not a good option.

Best is to take our chances. If it is an established company, go by reputation and ROE. Focus on high ROE companies. And if you can, do a ‘cash flow’ analysis. We have to hope that the promoter is also interested in the direction of the share price movement as we are, when we buy a share. Most important, try and understand the business and the “reason” as to why there is profit in the business and its longevity.  If I am a stickler for honesty, then I should simply invest in T-Bills of the Government of India.

With increasing instances of whistle blower complaints (Sun Pharma seems to be the newest one), do expect more and more names to come out in to the open. It is difficult to say who is next. Do not be surprised. After all, every company has owners and managers who have dreams and ambitions.

As an investor, the best defence we have is to have a diversified portfolio. Hopefully, with increasing disclosures and whistle blowers, there is better governance. History of governance becomes an important thing, rewards to shareholders (dividend payouts), capital allocation and ROEs become some measurable proxies. And one thing I am allergic to is DEBT. Rising debt generally portends dark days ahead.

December 5, 2018